Question

The legal process that gives the insurer, after payment of a loss, the right to seek recovery from a third party that was responsible for the loss is known as

1) Subrogation
2) Adverse selection
3) Right of rescission
4) Principle of indemnity

Answer 1

Subrogation is the legal process that allows an insurer to recover funds from a third party responsible for a loss after compensating the insured. This is part of an insurance method that includes mechanisms to reduce moral hazard, such as deductibles and coinsurance.

Step-by-step explanation:

The legal process that gives the insurer, after payment of a loss, the right to seek recovery from a third party that was responsible for the loss is known as subrogation. Insurance is a method of protecting a person from financial loss. Policyholders make regular payments to an insurance entity; in turn, the insurance firm remunerates members who suffer significant financial damage from an event covered by the policy. Subrogation allows the insurance company to recoup losses by taking legal action against the party responsible for the damage or loss.

To reduce moral hazard, insurance policies often include cost-sharing mechanisms such as deductibles, copayments, and coinsurance. These require the policyholder to pay a portion of the costs, incentivizing them to take precautions against risks. Moral hazard occurs when people have insurance against a certain event, making them less likely to guard against that event.